The Federal Reserve Board must
disclose documents identifying financial firms that might have
collapsed without the largest U.S. government bailout ever, a
federal appeals court said.
The U.S. Court of Appeals in Manhattan ruled today that the
Fed must release records of the unprecedented $2 trillion U.S.
loan program launched primarily after the 2008 collapse of
Lehman
Brothers Holdings Inc. The ruling upholds a decision of a
lower-court judge, who in August ordered that the information be
released.
The Fed had argued that disclosure of the documents
threatens to stigmatize borrowers and cause them “severe and
irreparable competitive injury,” discouraging banks in distress
from seeking help. A three-judge panel of the appeals court
rejected that argument in a unanimous decision.
The U.S. Freedom of
Information Act, or FOIA, “sets forth
no basis for the exemption the Board asks us to read into it,”
U.S. Circuit Chief Judge Dennis Jacobs wrote in the opinion.
“If the Board believes such an exemption would better serve the
national interest, it should ask Congress to amend the
statute.”
The opinion may not be the final word in the bid for the
documents, which was launched by Bloomberg LP, the parent of
Bloomberg News, with a November 2008 lawsuit. The Fed may seek a
rehearing or appeal to the full appeals court and eventually
petition the U.S.
Supreme Court.
Right to Know
If today’s ruling is upheld or not appealed by the Fed, it
will have to disclose the requested records. That may lead to
“catastrophic” results, including demands for the instant
disclosure of banks seeking help from the Fed, resulting in a
“death sentence” for such financial institutions, said Chris
Kotowski, a bank analyst at Oppenheimer & Co. in New York.
“Whenever the Fed extends funds to a bank, it should be
disclosed in private to the Congressional oversight committees,
but to release it to the public I think would be a horrific
mistake,” Kotowski said in an interview. “It would stigmatize
the banks, it would lead to all kinds of second-guessing of the
Fed, and I don’t see what public purpose is served by it.”
Senator Bernie Sanders,
an Independent from Vermont, said
the decision was a “major victory” for U.S. taxpayers.
“This money does not belong to the Federal Reserve,”
Sanders said in a statement. “It belongs to the American
people, and the American people have a right to know where more
than $2 trillion of their money has gone.”
Fed Review
The Fed is reviewing the decision and considering its
options for reconsideration or appeal, Fed spokesman David
Skidmore said.
“We’re obviously pleased with the court’s decision, which
is an important affirmation of the public’s right to know what
its government is up to,” said Thomas Golden,
a partner at New
York-based Willkie Farr & Gallagher LLP and Bloomberg’s outside
counsel.
The court was asked to decide whether loan records are
covered by FOIA. Historically, the type of government documents
sought in the case has been protected from public disclosure
because they might reveal competitive trade secrets.
The Fed had argued that it could withhold the information
under an exemption that allows federal agencies to refuse
disclosure of “trade secrets and commercial or financial
information obtained from a person and privileged or
confidential.”
Payment Processors
The
Clearing House Association, which processes payments
among banks, joined the case and sided with the Fed. The group
includes ABN Amro Bank NV, a unit of Royal Bank of Scotland Plc,
Bank of
America Corp., The Bank of New York Mellon Corp.,
Citigroup
Inc., Deutsche Bank AG, HSBC Holdings Plc, JPMorgan
Chase & Co., US Bancorp and Wells
Fargo & Co.
Paul Saltzman,
general counsel for the Clearing House, said
the decision did not address the “fundamental issue” of
whether disclosure would “competitively harm” borrower banks.
“The Second Circuit declined to follow the decisions of
other circuit courts recognizing that disclosure of certain
confidential information can impair the effectiveness of
government programs, such as lending programs,” Saltzman said
in a statement.
The Clearing House is considering whether to ask for a
rehearing by the full Second Circuit and, ultimately, review by
the U.S. Supreme Court, he said.
Deep Crisis
Oscar Suris, a
spokesman for Wells Fargo, JPMorgan
spokeswoman Jennifer
Zuccarelli, Bank of New York Mellon
spokesman Kevin Heine and RBS spokeswoman Linda Harper all
declined to comment. Deutsche Bank spokesman Ronald Weichert
couldn’t immediately comment. Bank of America declined to
comment, Scott Silvestri said. Citigroup spokeswoman Shannon
Bell declined to comment.
Bloomberg, majority-owned by New York Mayor Michael
Bloomberg, sued after the Fed refused to name the firms it lent
to or disclose loan amounts or assets used as collateral under
its lending programs. Most of the loans were made in response to
the deepest financial crisis since the Great Depression.
Lawyers for Bloomberg argued in court that the public has
the right to know basic information about the “unprecedented
and highly controversial use” of public money.
“Bloomberg has been trying for almost two years to break
down a brick wall of secrecy in order to vindicate the public’s
right to learn basic information,” Golden wrote in court
filings.
Potential Harm
Banks and the Fed warned that bailed-out lenders may be
hurt if the documents are made public, causing a run or a sell-
off by investors. Disclosure may hamstring the Fed’s ability to
deal with another crisis, they also argued.
Much of the debate at the appeals court argument on Jan. 11
centered on the potential harm to banks if it was revealed that
they borrowed from the Fed’s so-called discount window. Matthew
Collette, a lawyer for the government, said banks don’t do that
unless they have liquidity problems.
FOIA requires federal agencies to make government documents
available to the press and public. An exception to the statute
protects trade secrets and privileged or confidential financial
data. In her Aug. 24 ruling, U.S. District Judge Loretta Preska
in New York said the exception didn’t apply because there’s no
proof banks would suffer.
Tripartite Test
In its opinion today, the appeals court said that the
exception applies only if the agency can satisfy a three-part
test. The information must be a trade secret or commercial or
financial in character; must be obtained from a person; and must
be privileged or confidential, according to the opinion.
The court said that the information sought by Bloomberg was
not “obtained from” the borrowing banks. It rejected an
alternative argument the individual Federal Reserve Banks are
“persons,” for purposes of the law because they would not
suffer the kind of harm required under the “privileged and
confidential” requirement of the exemption.
In a related case, U.S. District Judge Alvin Hellerstein in
New York previously sided with the Fed and refused to order the
agency to release Fed documents that Fox News Network sought.
The appeals court today returned that case to Hellerstein and
told him to order the Fed to conduct further searches for
documents and determine whether the documents should be
disclosed.
“We are pleased that this information is finally, and
rightfully, going to be made available to the American public,”
said Kevin Magee,
Executive Vice President of Fox Business
Network, in a statement.
Balance Sheet Debt
The Fed’s balance sheet debt doubled after lending
standards were relaxed following Lehman’s failure on Sept. 15,
2008. That year, the Fed began extending credit directly to
companies that weren’t banks for the first time since the 1930s.
Total central bank lending exceeded $2 trillion for the first
time on Nov. 6, 2008, reaching $2.14 trillion on Sept. 23, 2009.
More than a dozen other groups or companies filed friend-
of-the-court briefs. Those arguing for disclosure of the records
included the American Society of News
Editors and individual
news organizations.
“It’s gratifying that the court recognizes the considerable
interest in knowing what is being done with our tax dollars,”
said Lucy Dalglish,
executive director of the Reporters
Committee for Freedom of the Press in Arlington, Virginia.
“We’ve learned some powerful lessons in the last 18 months
that citizens need to pay more attention to what’s going on in
the financial world. This decision will make it easier to do
that.”
The case is Bloomberg LP v. Board of Governors of the
Federal Reserve System, 09-04083, U.S. Court of Appeals for the
Second Circuit (New York).
